The Dorset Corporation produces and sells a single product. The following data refer to the year just completed: Assume that direct labor is a variable cost. a. Compute the unit product cost under both the absorption costing and variable costing approaches. b. Prepare an income statement for the year using absorption costing. c. Prepare an income statement for the year using variable costing. d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.
Expert Answer
Answer a | |||||
Computation of unit product cost under absorption costing and variable costing | |||||
Absorption Costing | Variable costing | ||||
Direct Material cost per unit | $281.00 | $281.00 | |||
Direct Labor cost per unit | $53.00 | $53.00 | |||
Variable Mfg overhead cost per unit | $40.00 | $40.00 | |||
Fixed Mfg Overhead cost per unit | $15.00 | $0.00 | |||
Unit Product Cost | $389.00 | $374.00 | |||
Fixed Manufacturing Overhead cost per unit = Total Fixed Manufacturing Overhead cost/units produced = $378000/25200 units = $15 | |||||
Answer b | |||||
Computation of Income statement for the year using absorption costing | |||||
Sales (23600 * $428) | $10,100,800 | ||||
Less : Cost of goods sold (23600*$389) | $9,180,400 | ||||
Gross Margin | $920,400 | ||||
less : Selling and administrative cost | |||||
– Fixed Cost | $401,200 | ||||
– Variable Cost | $377,600 | ||||
Net Income | $141,600 | ||||
Answer c | |||||
Computation of Income statement for the year using variable costing | |||||
Sales (23600 * $428) | $10,100,800 | ||||
Less : Cost of goods sold (23600*$374) | $8,826,400 | ||||
Less : Variable selling and admin expenses (23600 * $16) | $377,600 | ||||
Contribution Margin | $896,800 | ||||
less : Fixed Costs | |||||
Fixed Mfg Overhead cost | $378,000 | ||||
Fixed Selling and admin.cost | $401,200 | ||||
Net Income | $117,600 | ||||
Answer d | |||||
Reconciliation of the absorption costing and variable costing net operating Income | |||||
Absorption costing Net Income | $141,600 | ||||
Less : Fixed manufacturing overhead included in closing Inventories (1600 *$15) | $24,000 | ||||
Add : Fixed manufacturing overhead included in beginning Inventories | 0 | ||||
Variable costing Net income | $117,600 |